PRINC OF ECONOMICS PKG >CUSTOM<
PRINC OF ECONOMICS PKG >CUSTOM<
7th Edition
ISBN: 9781305018549
Author: Mankiw
Publisher: CENGAGE C
Question
Book Icon
Chapter 34, Problem 1CQQ
To determine

Relation between money supply and aggregate demand.

Expert Solution & Answer
Check Mark

Answer to Problem 1CQQ

Option ‘b’ is correct.

Explanation of Solution

Option (b):

By the theory of liquidity preference, an increase in the money supply shifts the money supply curve to the right causing the equilibrium interest rate to decrease. This stimulates consumption and investment, thereby expanding aggregate demand. Thus, option ‘b’ is correct.

Option (a):

Increase in money supply shifts the money supply curve to the right, which lowers the interest rate. Thus, option ‘a’ is incorrect.

Option (c):

By the theory of liquidity preference, a decrease in money supply shifts the money supply curve to the left causing the equilibrium interest rate to increase. This reduces consumption and investment, thereby contracting aggregate demand. Thus, option ‘c’ is incorrect.

Option (d):

Decrease in money supply shifts the money supply curve to the left, which increases the interest rate. Thus, option ‘d’ is incorrect.

Economics Concept Introduction

Concept introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period.

Money supply: Money supply refers to the total amount of monetary assets circulating in an economy during a particular period.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Click on the link to study the Economics in the News. Then answer the following questions. 120- 118- 3. Use the AS-AD model to show the changes in aggregate demand and aggregate supply that occurred in 2016 and 2017 that brought the economy to its situation in mid-2017. The graph shows the U.S. economy in the second quarter of 2016. Draw and label the long-run aggregate supply curve in 2017. Draw and label the aggregate demand curve in 2017. Draw a point at the short-run macroeconomic equilibrium in the second quarter of 2017. 116- 114- ☑--- Price level (GDP deflator, 2009=100) LAS 16 112- 110- 108- 106- 104- 102- $16.7 100- 16.6 16.7 16.8 16.9 17.0 SAS 16 = SAS17 AD 16 17.1 17.2 17.3 Real GDP (trillions of 2009 dollars) >>> Draw only the objects specified in the question. LV ☑
Price level (GDP deflator, 2009=100) Fed Raises Rates As Job Gains, Firming Inflation Stoke Confidence The U.S. Federal Reserve raised interest rates on Wednesday. The rate rise was the second in three months. This second rise comes in an economy that is growing faster and creating jobs at a more rapid pace. These gains are accompanied by a rising inflation rate. 140- 130- Source: Reuters, March 15, 2017 Describe the process by which the Fed's action reported in the news clip flows through the economy. 120- ... 110- LAS SAS → ☑ When the Fed raises the interest rate, A. aggregate demand decreases and short-run aggregate supply increases, and the price level falls B. aggregate demand increases and real GDP increases C. aggregate demand decreases and the price level falls D. short-run aggregate supply increases and the price level falls The graph shows the long-run aggregate supply curve and the short-run aggregate supply curve. Draw the AD curve to illustrate the state of the economy…
Price level (GDP deflator, 2009=100) Millennials Are Starting to Spend More Millennials, who spend an average of $85 a day, are expected to spend at a higher rate in the next fifteen years. Only 37 percent of Americans report higher spending today than a year ago, while 42 percent of millennials say they are spending more. Millennials are spending more on rent or mortgages and leisure activities than they were spending a year ago. 140- 130- Source: Business Journal, May 25, 2016 120- Describe the macroeconomic equilibrium after the change in spending by millennials. If the economy had been at a below full-employment equilibrium, then the economy will A. move to an above full-employment equilibrium with real GDP less than potential GDP B. move to a full-employment equilibrium as short-run aggregate supply increases at the same time 'C. move to a full-employment equilibrium and equilibrium real GDP equals potential GDP D. remain stuck in a below full-employment equilibrium If the economy…
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
Exploring Economics
Economics
ISBN:9781544336329
Author:Robert L. Sexton
Publisher:SAGE Publications, Inc
Text book image
Essentials of Economics (MindTap Course List)
Economics
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Principles of Macroeconomics (MindTap Course List)
Economics
ISBN:9781285165912
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Brief Principles of Macroeconomics (MindTap Cours...
Economics
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Principles of Economics, 7th Edition (MindTap Cou...
Economics
ISBN:9781285165875
Author:N. Gregory Mankiw
Publisher:Cengage Learning